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Microsoft server unit flips to quarterly loss

Hit with a stock-option transfer program and higher payroll costs, the unit posts a hefty operating loss in the December quarter, reversing the profit posted a year earlier.

Hit with a stock-option transfer program and higher payroll costs, Microsoft's server and tools business posted a hefty operating loss in the December quarter.

The unit lost $204 million, as compared with a $234 million profit in the same quarter a year earlier, according to a quarterly report filed Friday with the Securities and Exchange Commission. Microsoft's two other main units--the client business, which includes desktop versions of Windows, and the information worker unit, which includes Office sales--posted narrow improvements in their profits from a year ago.

Microsoft reports sales numbers for each of its business units as part of its quarterly earnings releases but does not note the profit or loss of each segment until it formally files with the SEC a few weeks later. In January, Microsoft reported earnings that topped expectations, excluding substantial charges for stock-based compensation and a stock option transfer program that allowed employees to sell underwater stock options.

The company also said in January that the stock-option transfer program dented overall profits by $1.48 billion, or 14 cents per share.

In its formal filing Friday, Microsoft attributed the loss in the server and tools business to the $651 million in costs incurred as part of the stock option transfer program and to a growing work force in the division. The stock program allowed employees to sell their underwater stock options to Wall Street firm JP Morgan.

"While revenue increased 21 percent, Server and Tools reported an operating loss because of stock-based compensation costs of $651 million related to the employee stock option transfer program, and a 10 percent increase in operating expenses including head-count related costs," Microsoft said in the filing.

A quarter earlier, the server unit, which includes Windows Server and other server software and developer tools, had been posting year-over-year gains in profit, while the Office and desktop Windows units saw their profits dip.

The company's other business units also all took a hit as a result of the stock option transfer program, although Microsoft managed to grow profits in its two other main businesses. The client unit grew profits to $2.07 billion, from $1.95 billion a year earlier, while the information worker unit saw profits reach $1.67 billion, up from $1.66 billion.

As for Microsoft's other units, the company posted a $79 million loss in its MSN business--that's smaller than the $197 million loss reported a year ago, but it follows a $58 million profit in the immediately preceding quarter. The Microsoft business solutions unit saw its loss narrow to $69 million from $87 million a year ago.

The home and entertainment unit, which includes the Xbox game console, narrowed its loss as well, to $394 million, from $412 million a year earlier. Meanwhile, the loss in the mobile and embedded device unit rose to $112 million from $75 million a year earlier.

The company also posted a wider loss for corporate and other expenses, recording $1.41 billion in such losses, as compared with $845 million a year earlier.